Fearful Stocks for Greedy Investors

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." -- Warren Buffett

Of all the Oracle of Omaha's orations, this one holds a special place in Foolish investors' hearts. When looking to bag a bargain, a panicked sell-off by jittery investors offers you a great chance to snap up stocks on the cheap.

In the short term, professional traders' pessimism can become a self-fulfilling prophecy. Desperate institutions lower their asking prices to get rid of a stock, prompting buyers' bid prices to fall in tandem, creating the very price decline that both sides feared in the first place -- until the selling stops.

Until it does, savvy investors can "get greedy," snapping up bargains from these fearful sellers. (Assuming they really are bargains.) In today's column, we'll see which stocks Wall Street's motivated sellers are most frantic to unload. Once we've compiled this shopping list of potential picks, we'll check them against the collective intelligence of Motley Fool CAPS.

Today's contenders include:

 

Recent Price

CAPS Rating (5 Max):

Synthesis Energy Systems (Nasdaq: SYMX  )

$4.58

*****

Dynegy  (NYSE: DYN  )

$3.92

****

MAG Silver (AMEX: MVG  )

$5.50

****

Conseco

$5.62

**

Rostelecom  (NYSE: ROS  )

$47.40

**

Companies are selected from the "Institutional Ownership Down Last Month" list published on MSN Money on the Saturday following close of trading last week. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

The world's going to heck in a handbasket, Fools. It's not just Wall Street that's scared these days -- I'm shaking myself. But before you jump to conclusions -- no, I'm not trembling with greed at the amazing plethora of profitable plays present in the table above. I'm just plain trembling, because these stocks are scary.

Take, for example, the top-rated stock on today's list: Synthesis Energy Systems. On the one hand, Synthesis' coal gasification technology sounds tailor-made for today's topsy-turvy world of energy pricing. But on the other hand, this company has no profits, it has negative free cash flow, and it has a price-to-sales ratio of -- better sit down for this -- 773. (And no, I did not forget a decimal.)

So for the first time in this column's history, I'm exercising editorial prerogative to veto a CAPS verdict. Synthesis is just plain too speculative, and too crazily overpriced, for me to even consider recommending it. Moving sprightly to our four stars, we've got Dynegy ... thanks, but no thanks. Any utility company that can't produce positive free cash flow and pay me a dividend, I ain't interested in. And finally, MAG Silver. This one intrigues me.

The bull case for MAG Silver

  • binv271828 introduced us to this one at the height of the silver, er, gold rush back in May: "Mag Silver Corp. This is an ADR for a Canadian-based junior silver miner who has their mines in Mexico ... they have found some very high silver grade strikes recently."
  • Why buy a shiny metal miner? Back in July, adventurerneil put the buy thesis plainly: "Gold and silver to pop against a sickly economy ..."

And our economy is certainly looking sick lately, sending precious metals miners' stocks soaring last week -- Newmont Mining (NYSE: NEM  ) gained 6% for the week, Yamana Gold (NYSE: AUY  ) 11%, and Barrick Gold (NYSE: ABX  ) , 19% -- as investors fled in search of "safe havens."

In contrast, MAG Silver's shares dropped 5%, even after assay results were announced Thursday that helped to pare the losses. Longer-term, MAG Silver's shares are down 31% since Q2 results were released last month -- and for the life of me, I didn't see any bad news in those results either. To the contrary, what I see here is a stock with $64 million in cash, no long-term debt, and burning only about $3 million a year on its exploration activities. Quite literally, MAG Silver appears to have two decades in which to make its "lucky strike" before it would need to seek new capital.

Now, mind you -- I'm far from an expert in mining companies. I know even less about investing in companies like MAG Silver, which isn't actually mining anything yet, but just poking holes in Mexican dirt, sniffing around for silver. But the very fact that nothing seems to have changed in this company's story, while the stock is for sale at almost half off, suggests there may be an opportunity here.

Time to chime in
Meanwhile, I'm sure there's at least one or two diggin' Fools out there among the 115,000 members of the CAPS community. If you know more than I do about MAG Silver (and believe it or not, you almost certainly do), then here's your chance to shine. Click on over to CAPS and tell us why this stock's a buy -- or not.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous. 

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked No. 376 out of more than 115,000 players. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2008, at 4:27 PM, XMFSinchiruna wrote:

    Hi Rich,

    A 30% or more drop in shares from late summer through to early last week was observed pretty much across the board for every junior miner or exploration company, so I think you're correct in noting a disconnect between the lack of specific news and the dramatic share price decline.

    The mining sector still has a way to go to regain the levels from July before the most recent and punishing wave of the broader commodities correction took hold, but i think the past week has provided a Foolishly convincing start. :)

  • Report this Comment On September 26, 2008, at 5:44 PM, TMFDitty wrote:

    And Fools, if I might add... unlike myself, TMFSinchiruna actually *understands* miners.

    So, "what he said."

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